[By Sushmit Mandal and Pratim Majumder]
The authors are students at National Law University Odisha, Cuttack.
The substantial growth of the digital payment ecosystem in India has enhanced the need for more effective implementation of a framework to govern digital payments. In an attempt to strengthen and ensure better compliance of regulations and to foster the best practices on system security, pricing, customer protection measures and grievance redressal mechanisms, the Reserve Bank of India (‘RBI’) on August 18, 2020, published the Draft Framework for grant of recognition to an industry association as a Self-Regulatory Organisation for Payment System Operators(‘Draft Framework’). The establishment of a Self-Regulatory Organisation (‘SRO’) for the digital payment ecosystem is in line with the RBI’s Payment and Settlement Systems in India Vision 2019-21. Further, the establishment of an SRO for Payment System Operators (‘PSOs’) was also one of the major recommendations set out in the Report of the High Level Committee on Deepening of Digital Payments published on May 17, 2019. Based on such recommendation, the RBI expressed its intention to draft a framework for establishing an SRO for the digital payment system in the Statement on Developmental and Regulatory Policies published on February 6, 2020. It is expected that the SRO by virtue of being developed by the industry itself, would lead to more practicable standards and encourage better compliance. The article traces the application of SROs in an Indian context with a look at their success in some other jurisdictions. Second, the terminology and context of the Draft Framework are scrutinised to recognise potential benefits and lacunae with a final take on the way ahead to the final framework as an anticipated new development in our PSO regulatory space.
Background and Rationale
With the introduction of the new Framework, the RBI has decided to recognise and constitute an SRO that would be responsible for making and enforcing rules for PSOs, subject to their membership. The proposed SRO, as seen in clause 1.4 and 3.1, shall be a non-governmental and not-for-profit company, which would collaborate with interested stakeholders to protect customers and encourage ethics, equality and professionalism in the market. Further, the single-most crucial function of the SRO would be to act as a link between the RBI and its members. The RBI believes that the establishment of the SRO would allow the implementation of self-regulatory processes through an impartial mechanism which would, in turn, enable the members to operate in a disciplined environment without undue pressure from the regulator.
The SRO model is not unconventional and has been earlier witnessed in India. The RBI has earlier issued a framework for establishing SROs for NBFC-Microfinance Institutions. Similarly, the Securities Exchange Board of India (‘SEBI’) has issued specific regulations, namely the SEBI (Self-Regulatory Organizations) Regulations, 2004 (‘SEBI SRO Regulations’) for SROs requiring recognition from SEBI. The concept of industry associations in the digital payment sector is a recognised phenomenon globally as well. In Australia, the Australian Payments Network (‘AusPayNet’) acts as an SRO and is responsible for developing practices governing the payments, clearing and settlement where the Reserve Bank of Australia only intervenes when the SRO fails to address the public interest. The AusPayNet played a pivotal role in the formation of the New Payments Platform. Further, in Singapore, the Singapore Payments Council (‘SPC’) formed by the Monetary Authority of Singapore (‘MAS’), consists of banks, payment service providers, businesses and trade associations. The SPC inter alia seeks to promote cooperation amongst the e-payment entities and adoption of e-payments.
Expected Benefits and Potential Pitfalls
The formation of the SRO can be a positive step towards a more grassroot level approach to govern market players. It can show the willingness of the regulator to work along with the industry towards developing a robust digital payment ecosystem. Further, SROs due to their technical expertise and more in-depth understanding of the market can supplement the work of the regulator and help in framing practical standards for the industry, unshackled from weighty regulations. However, legitimate concerns of transparency and accountability cannot be denied and must be properly laid down in the final framework.
One of the potential pitfalls is the existence of undue influence in an SRO where the constituting members are the PSOs themselves; therefore, the final framework must lay down the provision to exercise checks and balances over any potential conflict, which may arise between their business and regulatory duties. However, the Draft Framework relays that the SRO will have the legal authority to enable it to set and enforce policies/standards for members with the caveat that any such mandates may not replace applicable laws or regulations. Further, the Draft Framework fails to flesh out the ownership and governance structure of the proposed SRO. Therefore, the final framework must introduce a relevant provision for maintaining the balance between the SRO’s independence in exercising its authority in tandem with the regulatory oversight of the RBI. A balancing act needs to be undertaken to introduce an adequate amount of accountability without undermining the SRO’s authority.
An important component of any regulatory body’s arsenal for enforcing discipline is adequate penalties, which are presently left to formulation and enforcement to the SRO itself. It is perhaps more prudent for the RBI to provide basic structural pointers in terms of minimum quantifiable penalties and a non-exhaustive list of trigger events which might cause the levy of such penalties. The SRO thus shall retain the power to frame penalties for its members with its keener insights into the members whereas remaining bound towards implementing the broader dictum of the RBI. A case in point is Regulation 15(3) of the SEBI SRO Regulations which provides a general framework of penalties for SRO members such as expulsion from membership or suspension from membership for a specified time, but noteworthy is the explicit specification of non-monetary penalties which might not be the best deterrent even in the case of PSOs.
The Draft Framework falls a tad bit short of defining specific word usages, which can negatively impact interpretation and compliance, the foremost of these being in the prescribed ‘fit and proper criteria’. The use of such words is open to interpretative ambiguity and is left to the discretion of the RBI, allowing an element of subjectivity and arbitrariness in the process. Additionally, the requirement of possessing a majority of the industry segment it seeks to represent, in terms of number/volume/value for applying to be recognised as an SRO is slightly vague. There is no guidance as to the division of industry segments in the already narrow subset of PSOs in the payment system. To exacerbate this, the number and volume remain undefined as to the parameter: whether it is sales figures, market share or perhaps even market capitalisation. Value as a parameter too suffers a similar fate in terms of no clarity as to whether this means the company’s valuation or a different factor. A reference point again, is Regulation 4(c) of the SEBI SRO Regulations which specify a quantifiable minimum net worth of one crore rupees for applicants in the eligibility conditions. In all, the final framework should work towards quantifying a well-defined threshold for all three – number/volume/value to allow a clear-cut and no-frills application process.
The RBI’s intent seems wholly well-founded and based on a keen finger on the pulse of the industry in terms of its needs. However, it is indeed an interesting question as to why leave the other players in a payment environment – namely Payment Service Providers (PSPs) and Technology Service Provider (TSPs) from the ambit of the SRO’s membership. A thriving ecosystem needs vital inputs and cohesion amongst all its stakeholders. It is perhaps an oversight to exclude PSPs and TSPs from the SRO unless the formation of specialised SROs is in the RBI’s cards for future implementation, which might be an interesting development.
The RBI also lays out the single most essential objective of the SRO would be to look at the larger picture of the segment/industry to address concerns beyond the self-interest of its members. This over-arching statement will only find expression through effective policies framed by the SRO along with deterrent penalties for non-compliance which ought to be chalked out in more precise terms in the final framework along with an urgent amelioration of the use of vague or ill-defined terminology as highlighted previously. With this, the SRO shall be a huge step towards realising the specified benefit of members adhering to specific standards of conduct along with the promotion of ethical ways of doing business. While this is an exciting new development and much expectation coupled with anticipation, it remains to be seen how streamlined and mainstream SROs become in the regulatory scheme of the RBI.